N.Y. Banking and Insurance Superintendent Unveils Aggressive Agenda

Benjamin M. Lawsky, who heads the New York State Department of Financial Services (DFS), indicated that his agency is seriously considering more aggressive investigation and pursuit of individuals whose malfeasance has led (or may lead) to significant losses on Wall Street. Citing public discontent that not a single senior executive has been prosecuted or subjected to severe civil sanctions for wrongdoing that led to the financial crisis or occurred in its wake, Mr. Lawsky decried the “accountability gap” on Wall Street. That gap fuels public outrage, he said, even as a proliferation of post-crisis scandals—money laundering, LIBOR, tax evasion, and currency manipulation—suggest that lessons from the crisis have not adequately been learned. 

Speaking at the Exchequer Club in Washington, D.C., on March 19, 2014, Mr. Lawsky said that citing a “culture on Wall Street” and only penalizing the institutions themselves plays into an “everyone was doing it” defense for individuals who engage in misconduct. He blames “lax enforcement” by regulators as contributing to a vicious cycle of scandal after scandal and a mindset that wrongdoing for profit is worth the risk because many people don’t get caught and, even if caught, are not held personally responsible.

Mr. Lawsky’s opinion is that real deterrence cannot be accomplished solely by corporate accountability, regardless of the size of the fines and penalties, and can only succeed if regulators and prosecutors change that focus to individual accountability. That entails two steps: first, public disclosure, in great detail, of actual, specific misconduct engaged in by individuals; and second, severe sanctions for those individuals. Such sanctions could include fines and imprisonment on the criminal side but also suspensions, terminations, bonus clawbacks, and other civil remedies.

Touching on other topics in his address, Mr. Lawsky characterized banks’ exit from the mortgage servicing business as an unintended consequence of Basel III and expressed concern that nonbank servicers have become so large so fast that he apprehends harm to consumers, particularly in the foreclosure context. He indicated that DFS is cooperating closely with the Consumer Financial Protection Bureau on this and other matters.

We can also expect DFS to focus with greater intensity on unregulated “niche players” (among whom Mr. Lawsky mentioned only payday lenders explicitly, but clearly he has other nonbank lenders in mind as well). The agency will also focus on areas that are either ignored or under-enforced by federal regulators.

In recent months, DFS has paid considerable attention to virtual currencies and held a major hearing on the subject last summer. Topics of concern include:

  • Investor activity in the virtual currency space 
  • Consumer protection issues 
  • Law enforcement concerns linked to the pseudo-anonymity of virtual currency users 
  • The potential and limitations of the related technology
  • Fundamental safety and soundness considerations

DFS has determined that virtual currencies are not going to disappear anytime soon, so they might as well be regulated. On March 11, Mr. Lawsky issued an order to the effect that DFS will consider formal proposals and applications by firms wishing to operate virtual currency exchanges in New York. Regulatory priorities in this space will include robust standards for consumer protection, cybersecurity, and anti-money laundering compliance.

During a Q&A session following his address, Mr. Lawsky expressed surprise that people are not paying adequate attention to insurance regulatory issues. Citing significant activity on the international insurance regulatory front, Mr. Lawsky criticized a proposed global capital standard as relying too heavily on Basel models without recognizing the significant differences between bank capital and insurance company capital structures.

- Keith R. Fisher

FTC and EEOC Issue Joint Guidance on Employer Use of Background CheckS

A new joint publication of the Federal Trade Commission (FTC) and Equal Employment Opportunity Commission (EEOC) serves as a reminder to employers of the risks that come with the use of background information when making personnel decisions, including hiring, retention, promotion, and reassignment. Titled “Background Checks: What Employers Need to Know,” the publication seeks to guide employers on how to comply with both the Fair Credit Reporting Act (FCRA) and federal nondiscrimination laws in obtaining background information, as well as using and disposing of such information.

Regarding FCRA compliance, the publication reviews the requirements that apply when background information is obtained from a company that acts as a consumer reporting agency under the FCRA. Those requirements address advance notice, written employee consent, and certification to the information provider. The publication also reviews the FCRA’s adverse action requirements, which include a pre-action notice and summary of FCRA rights and a post-action notice, and the FCRA requirement for secure disposal of background reports. 

In addition to the risk of FTC enforcement, nonbank employers other than auto dealers can alsobe the subject of FCRA enforcement actions by the Consumer Financial Protection Bureau (CFPB) even if they are not providers of consumer financial products and services. The CFPB and FTC share FCRA enforcement authority regarding such nonbanks, and the CFPB can also enforce the FCRA against large banks.

In the area of compliance with federal nondiscrimination laws, the publication includes warnings about: 

  • Obtaining background checks on applicants or employees based on an individual’s race, national origin, color, sex, religion, disability, genetic information (including family medical history), or age (40 or older)
  • Basing employment decisions on background information that has a disparate impact on certain protected classes
  • Obtaining genetic information from applicants and employees and seeking medical information before extending a conditional offer of employment

The publication also discusses the need to apply standards equally to all applicants and employees and the importance of considering making exceptions for problems caused by disabilities. EEOC and U.S. Department of Labor record retention requirements are discussed in the publication as well. (See our prior legal alert regarding two lawsuits filed by the EEOC last year alleging that employers’ use of criminal background checks to screen job applicants disproportionately excluded African Americans from employment in violation of federal nondiscrimination laws. In addition, a recording of our webinar titled “New Hazards in Hiring: Criminal Background Checks and Beyond” is available here.)

While focused on federal law, the publication notes that some states and local governments regulate the use of background information and advises employers to also review applicable state and local laws.  

- Alan S. Kaplinsky, John L. Culhane, Jr., and Patricia A. Smith

Providing Cell Phone Number To Register Membership Gives TCPA Consent for Text Message

A consumer who voluntarily provides a cell phone number when registering online for membership has given “prior express consent” under the Telephone Consumer Protection Act (TCPA) to receive a text message containing instructions for activating such membership, a Washington federal court recently ruled.

In Aderhold v. Car2go N.A., LLC, the plaintiff had entered his e-mail address and cell phone number on an online registration form he completed to become a member of a local car-sharing service. He also checked boxes to confirm his review and acceptance of various documents, including a “Trip Process” document that indicated the defendant would validate information provided by the plaintiff and confirm acceptance of his registration.

Such documents also included a privacy policy that indicated the defendant would use the plaintiff’s personal information for business purposes that included membership validation. Within seconds of submitting the form, the plaintiff received an e-mail and text message from the defendant. The text message directed him to enter an activation code into a link contained in the e-mail and stated that the defendant looked forward to welcoming him.

The plaintiff alleged that the text message violated the TCPA provision that makes it unlawful to make autodialed or prerecorded non-emergency calls to a cell phone number unless the call is made with “the prior express consent of the called party.” He argued that he did not give “express consent” by providing his cell phone number because there was no accompanying disclosure by the defendant that doing so would result in his receipt of a text message.

As an initial matter, the court rejected the plaintiff’s argument that the text message he received was not subject to the Federal Communications Commission’s (FCC’s) ruling that “persons who knowingly release their phone numbers have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary.” It then reviewed numerous cases in which federal courts found that express consent was given to receive text messages “based on the context of the transaction in which a consumer provides her cellular number.”

Stating that it did not “purport to rule upon what ‘prior express consent’ means in every case,” the court held that the plaintiff consented to the text message at issue. In the court’s view, the text message fell “squarely within the scope of” the disclosures the plaintiff received when he registered because it validated his cell phone number, confirmed acceptance of his application, and was a form of membership validation.

While observing that the plaintiff “arguably did not explicitly grant permission for car2go to contact him by text message,” the court nevertheless stated that “no reasonable person in his shoes could have doubted that car2go would contact him in some manner.” The court also said the defendant’s use of text message was “not significant” because the plaintiff “clearly and unmistakably consented to being contacted about his registration.”

Using “the common sense approach that courts construing the TCPA have advocated,” the court further observed that, even if the defendant had made no disclosures, “it defies logic to contend that [the plaintiff] did not consent to be contacted regarding his membership application” and that “when people provide their telephone numbers in commercial transactions, it would be odd to imagine that they do not consent to be contacted for purposes of completing that transaction.”

Effective October 16, 2013, the FCC’s TCPA rules were changed to require prior express written consent for autodialed or prerecorded telemarketing calls to cell phone numbers. Such consent must be in the form of an agreement that satisfies specified FCC requirements. The rules change, however, does not affect autodialed or prerecorded “informational” non-sales calls to cell phone numbers such as the Aderhold text message. Such calls can still be made with only the consumer’s “prior express consent,” which can be written or oral, so long as the caller can prove there was consent.

Because the Aderhold text message was sent in 2012, it would not have been subject to the new FCC rules. The court declined to analyze whether it would have been prohibited by the new rules had they then been in effect. Nonetheless, the court found unpersuasive the plaintiff’s argument that the text was a telemarketing message because the link took him to a website that included promotions for the service.

We continue to see a high volume of class actions alleging TCPA violations. In part, this is because the penalties are draconian. Violations can yield damages of $500 per violation or actual damages—whichever is greater—with a tripling of damages for willful violations and unlimited class action liability.

Barbara S. Mishkin

N.Y. Department of Financial Services Amends Terms Governing Subprime Loans

The New York Department of Financial Services (DFS) has amended certain terms governing subprime loans under Part 43 of the General Regulations of the Superintendent. The amendment was adopted on March 19, 2014, and is effective immediately.

Specifically, the DFS amended the definition of the terms “week” and “commitment” in relation to the Real Estate Settlement Procedures Act (RESPA) Good Faith estimate disclosures. Under the new rule, the term “week” now refers to the seven-day period from Friday through Thursday, the day on which the Federal Home Loan Mortgage Corporation publishes its Primary Mortgage Market Survey. The term “commitment” referred to in Section 6-m(1)(b) signifies the good faith estimate in all cases where the commitment is not issued by the lender.

The amendment is the latest in a series of DFS regulations intended to further clarify when a loan is subprime under Section 6-M of the New York Banking Law.

- Justin Angelo


Copyright © 2014 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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